Shares of Ross Stores (ROST -0.57%), a discount apparel and home fashion retailer, fell just shy of 25% at the open of trading on May 20. That massive drop was precipitated by the company's first-quarter 2022 earnings update, which hit the Street after the close on May 19. Investors clearly didn't like what they saw.
On the top line, Ross Stores brought in $4.3 billion in the first quarter of 2022, down from $4.5 billion in the same period of 2021. Comparable-store sales declined 7%, which is not particularly encouraging. Management tried to put a positive spin on that figure, however, by noting the 13% year-over-year comps gain in the first quarter of 2021.
So it was a very tough comparison, but slowing same-store sales at a time when investors are worried about a potential recession is still not a positive. Analysts, meanwhile, had been looking for sales that were slightly higher.
The bottom line was even worse for Ross Stores. The company earned $0.97 per share, down from $1.34 in the first quarter of 2021. The tally in 2022, meanwhile, includes a temporary benefit related to expenses of around $0.06 per share that is expected to reverse later in the year. Analysts were calling for $0.99 per share, so it was a top- and bottom-line miss this quarter. Investors don't like that sort of thing, noting that inflationary pressures were a key highlight in the weak results.
On the inflation front, Ross' operating margin fell to 10.8% in the first quarter of 2022 versus 14.2% last year, a hefty drop of 3.4 percentage points. These are the same types of pressures that caused Target to plunge, taking almost the entire retail sector with it just a few days ago. Investors are increasingly worried about the combination of slowing sales and rising operating costs, with any hint of risk leading to steep stock declines for retailers.
Adding to the list of troubles for Ross Stores, management also updated its full-year 2022 guidance, explaining that, "Given our first-quarter results and today's increasingly uncertain macroeconomic and geopolitical environment, we believe it is prudent to adopt a more conservative outlook for the balance of the year."
At this point, the company expects comps to fall between 2% and 4%, with earnings dropping to between $4.34 per share and $4.58, down from $4.87 in 2021. No wonder investors were in a selling mood.